Some Fallacies in Corporate Finance: A Coaseian Perspective
Bibliographic record
Abstract
We argue that the Modigliani and Miller (1958, 1961, 1963) Irrelevance Theorems are subsumed by the Coase Theorem (Coase, 1960). We employ the Coase Theorem to critique two fundamental results in the corporate finance literature. Specifically, we reject the claim by DeAngelo and DeAngelo (2006) that dividends are relevant in frictionless markets. Using the logic of the Coase Theorem, we argue that the solution offered by DeAngelo and DeAngelo (2006) is not in equilibrium. In addition, we reject the claim by Myers (1977) that corporate investment is negatively related to leverage in frictionless markets (the so-called underinvestment problem). If the firm plans to underinvest because of debt overhang, shareholders and debt holders will costlessly re-contract around the debt overhang until the firm takes on the optimal investment. However, if we were to interpret Myers (1977) as implicitly assuming transaction costs or other frictions, then an underinvestment equilibrium could emerge since Coaseian efficiency generally fails to emerge in such settings. In the context of Myers (1977), transaction costs of re-contracting limit the full internalization of externalities engendered by the actions of controlling shareholders and yield underinvestment. Other frictions due to asymmetric information, or free rider and empty core problems in the bargaining/recontracting process, can also undermine Coaseian efficiency and generate underinvestment equilibria.
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How this classification was reachedexpand
Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.001 | 0.000 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.000 | 0.001 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one teacher head, not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".